SCOTIABANK PERÚ S.A.A. AND SUBSIDIARIES. Consolidated Interim Financial Statements March 31, 2016

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4 Consolidated Interim Financial Statements March 31, 2016 Contents Page Consolidated Interim Financial Statements Consolidated Statement of Financial Position 1 Consolidated Income Statement 2 Consolidated Income Statement and Other Comprehensive Income 3 Consolidated Statement of Changes in Shareholders Equity 4 Consolidated Statement of Cash Flows

5 Consolidated Statement of Financial Position As of March 31, 2016 and December 31, 2015 In thousands of soles Note (Unaudited) (Audited) In thousands of soles Note (Unaudited) (Audited) Assets Liabilities and shareholders equity Cash and due from banks: 6 Deposits and obligations in financial Cash 1,163,289 1,124,284 system entities 14 Deposits with Banco Central de Reserva del Perú 6,966,875 8,995,007 Demand deposits 10,524,253 10,834,510 Deposits with local and foreign banks 188, ,963 Savings deposits 7,573,150 7,509,487 Clearing 48,974 46,852 Time deposits 15,505,283 16,190,773 Other cash and due from banks 4,246,999 4,394,261 Other obligations 1,185,677 1,211,006 12,614,939 14,856,367 34,788,363 35,745,776 Interbank funds 610,070 - Interbank funds - 385,467 Investments at fair value through Borrowings and financial obligations 15 10,654,146 11,645,777 profit or loss and available-for-sale investments 7 4,268,100 3,995,830 Held-for trading derivative instruments 9 378, ,011 Loan portfolio, net 8 37,581,855 38,333,350 Provisions and other liabilities 16 6,296,139 5,873,468 Held-for trading derivative instruments 9 343, ,001 Total liabilities 52,117,321 53,857,499 Accounts receivable, net , ,750 Shareholders' equity 17 Investments in associates 68,332 69,338 Capital stock 4,816,666 4,156,666 Goodwill , ,892 Additional paid-in capital 368, ,513 Property, furniture, and equipment, net , ,202 Legal reserve 843, ,398 Deferred tax assets , ,965 Unrealized earnings (722) (10,693) Other assets, net , ,511 Retained earnings 257, ,823 Total shareholders equity 6,285,908 6,237,707 Total assets 58,403,229 60,095,206 Total liabilities and shareholders equity 58,403,229 60,095,206 Risks and contingent commitments 19 47,412,551 50,649,266 Risks and contingent commitments 19 47,412,551 50,649,266 The accompanying notes on pages 6 to 71 are part of these consolidated interim financial statements. 1

6 Consolidated Income Statement For the three-month periods ended March 31, 2016 and 2015 In thousands of soles Note 2016 (Unaudited) 2015 (Unaudited) Interest income 20 1,087, ,791 Interest expenses 21 (264,699) (174,775) Gross finance income 822, ,016 Provisions for loans, net of recoveries 8 (252,634) (189,989) Net finance income 570, ,027 Income from finance services, net , ,234 Net finance income and finance service expenses 742, ,261 Results from financial transactions 23 75,385 89,484 Operating margin 817, ,745 Administrative expenses 24 (384,315) (370,115) Depreciation of property, furniture, and equipment (16,333) (16,328) Amortization of intangible assets (3,983) (4,364) Net operating margin 413, ,938 Net provisions for contingent loans, doubtful and other accounts receivable, realizable, repossessed assets, and other assets (4,220) (10,232) Operating results 408, ,706 Other income, net 25 (841) 13,923 Net profit before income tax 408, ,629 Deferred income tax 27 3,645 (2,325) Current income tax 26(a) (120,794) (116,169) Net profit 290, ,135 The accompanying notes on pages 6 to 71 are part of these consolidated interim financial statements. 2

7 Consolidated Income Statement and Other Comprehensive Income For the three-month periods ended March 31, 2016 and 2015 In thousands of soles 2016 (Unaudited) 2015 (Unaudited) Net profit 290, ,135 Other comprehensive income Gains (loss) on available-for-sale investments 9,982 (9,879) Share in other comprehensive income of associates (11) 5 Other - 82 Income tax effect - 16,665 Other comprehensive income, net of income tax 9,971 6,873 Total comprehensive income of the year 300, ,008 The accompanying notes on pages 6 to 71 are part of these consolidated interim financial statements. 3

8 Consolidated Statement of Changes in Shareholders Equity For the three-month periods ended March 31, 2016 and 2015 In thousands of soles Number of shares (note 17.b) Capital stock (note 17.b) Additional paid - in capital (note 17.c) Legal reserve (note 17.d) Unrealized earnings (note 17.f) Retained earnings (nota 17.e) Total shareholders equity Balance as of December 31, 2014 (Audited) 365,502,212 3,683, , ,777 22, ,654 5,646,063 Net profit , ,135 Other comprehensive income Unrealized loss on available-for-sale investments (6,663) - (6,663) Unrealized gain on investments in associates Other adjustments ,531-13,531 Total comprehensive income , , ,008 Application to legal reserve ,621 - (95,621) - Dividend distribution (382,484) (382,484) Operations with treasury shares - (1) (1) Other adjustments (4,477) (4,477) Balance as of March 31, 2015 (Unaudited) 365,502,212 3,683, , ,398 28, ,207 5,514,109 Balance as of December 31, 2015 (Audited) 412,864,969 4,156, , ,398 (10,693) 980,823 6,237,707 Net profit , ,910 Other comprehensive income Unrealized gain on available-for-sale investments ,982-9,982 Unrealized loss on investment in associates (11) - (11) Total comprehensive income , , ,881 Application to legal reserve ,403 - (101,403) - Dividend distribution (252,630) (252,630) Capitalization of retained earnings 66,000, , (660,000) - Other adjustments (50) (50) Balance as of March 31, 2016 (Unaudited) 478,864,969 4,816, , ,801 (722) 257,650 6,285,908 The accompanying notes on pages 6 to 71 are part of these consolidated interim financial statements. 4

9 Consolidated Statement of Cash Flows For the three-month periods ended March 31, 2016 and 2015 In thousands of soles 2016 (Unaudited) 2015 (Unaudited) Cash flows from operating activities Net profit 290, ,135 Adjustments to reconcile net profit to cash from (used in) operating activities Provision for doubtful loans, net of recoveries 252, ,989 Provision (recovery) for realizable, repossessed and other assets, net 1,525 (1,422) Provision for accounts receivable, net 3,591 3,543 Depreciation and amortization 20,316 20,692 Provision for fringe benefits 12,092 11,568 Provision for current and deferred income tax 124, ,494 (Recoveries) provision for contingent loans and country risk, net (1,011) 2,394 (Recoveries) other provisions, net (54,767) 91,978 Loss on sale of property, furniture, and equipment 4,688 - Gains on sale of realizable and repossessed assets (408) (324) Net changes in assets and liabilities Loans 494,883 (1,140,455) Investments at fair value through profit and loss 401,165 (417,716) Available-for-sale investments (663,287) (290,164) Accounts receivable (109,637) 67,416 Other assets (200,592) (235,335) Non-subordinated financial liabilities (2,164,703) 2,745,279 Accounts payable 191, ,917 Provisions and other liabilities (2,132) 337,350 Net (loss) profit after net changes in assets, liabilities and adjustments (1,399,076) 2,384,339 Income taxes paid (130,103) (93,383) Net cash and cash equivalents (used in) from operating activities (1,529,179) 2,290,956 Cash flows from investing activities Sale of property, furniture, and equipment 13 - Acquisition of other financial assets (971) (763) Acquisition of property, furniture, and equipment (8,955) (5,301) Dividends received Net cash and cash equivalents used in investing activities (9,910) (5,595) Net (decrease) increase in cash and cash equivalents, before the effect of exchange rate fluctuations (1,539,089) 2,285,361 Exchange rate fluctuations effect on cash and cash equivalents 54,882 (88,845) Net (decrease) increase in cash and cash equivalents (1,484,207) 2,196,516 Cash and cash equivalents at beginning of year 10,467,542 9,333,677 Cash and cash equivalents at end of year 8,983,335 11,530,193 The accompanying notes on pages 6 to 71 are part of these consolidated interim financial statements. 5

10 1. Background and Reporting Entity A. Background Scotiabank Perú S.A.A. (hereinafter the Bank) is a subsidiary of The Bank of Nova Scotia - BNS (a financial entity from Canada), which holds directly and indirectly 97.81% of the Bank s capital stock as of March 31, 2016 and December 31, The Bank of Nova Scotia directly owned 2.32% of the Bank s shares, and indirectly through NW Holdings Ltd. and Scotia Perú Holdings S.A. owned 55.32% and 40.17% of shares as of March 31, 2016 and December 31, 2015, respectively. B. Reporting entity The Bank is a public corporation established on February 2, 1943 and is authorized to operate as a banking entity by Superintendencia de Banca, Seguros y Administradoras Privadas de Fondos de Pensiones (Banking, Insurance and Pension Plan Agency, hereinafter the SBS). Bank s operations are governed by the SBS through the Ley General del Sistema Financiero y del Sistema de Seguros y Orgánica, Law (hereinafter the Banking Law).This law establishes the requirements, rights, obligations, guarantees, restrictions, and other operating conditions that Peruvian banking and insurance legal entities are governed. The Bank s registered office address is Av. Dionisio Derteano N 102, San Isidro, Lima, Peru. As of March 31, 2016, Scotiabank Perú S.A.A. and Subsidiaries performed its activities through a national network of 351 branches, and one branch abroad (as of December 31, 2015, it had 354 Peruvian branches and one branch abroad). As of March 31, 2016 and December 31, 2015, the accompanying financial statements include those corresponding to the Bank and other companies that are part of the consolidated group (hereinafter Scotiabank Perú S.A.A. and Subsidiaries or Scotiabank Group), such as: CrediScotia Financiera S.A., engaged in intermediation operations for the small - business and consumer sectors; Servicios, Cobranzas e Inversiones S.A.C., engaged in collections and domicile verification, among other activities; Scotia Sociedad Agente de Bolsa S.A. (hereinafter SAB), engaged in intermediation activities in the Peruvian securities market; Scotia Fondos Sociedad Administradora de Fondos S.A. (hereinafter SAF), engaged in mutual funds management; Scotia Sociedad Titulizadora S.A., (hereinafter Titulizadora), engaged in the management of trusts as well as special purpose entities called SBP DPR Finance Company, Fideicomiso Crediscotia-Dinero Electrónico and the Trust Equity Inmuebles Depsa, and finally Promoción de Proyectos Immobiliarios y Comerciales S.A. which to date is inactive. 6

11 Below are the main balances of the Bank and other companies mentioned in the previous paragraphs as of March 31, 2016 and December 31, 2015 indicating the Bank s shareholding percentages, as well as relevant information in this regards: In thousands of soles Activity Shareholding percentage Assets Liabilities Shareholders' equity Scotiabank Perú S.A.A. Banking - 55,445,437 49,211,179 6,234,258 CrediScotia Financiera S.A. Financing ,088,427 3,529, ,981 Servicios, Cobranzas e Inversiones S.A.C. Collection services ,483 55,658 66,825 Scotia Sociedad Agente de Bolsa S.A. Stock market broker ,998 3,102 73,896 Scotia Fondos Sociedad Administradora de Fondos S.A. Administration of Mutual funds ,844 2,696 33,148 Scotia Sociedad Titulizadora S.A. Securitization , ,109 Patrimonio en Fideicomiso sobre Bienes Inmuebles Depsa Special purpose entity - 2,358 1,292 1,066 Fideicomiso CrediScotia Dinero Electrónico Special purpose entity (10) SBP DPR Finance Company Special purpose entity - 351, , In thousands of soles Activity Shareholding percentage Assets Liabilities Shareholders' equity Scotiabank Perú S.A.A. Banking - 57,168,520 50,896,629 6,271,891 CrediScotia Financiera S.A. Financing ,011,435 3,443, ,699 Servicios, Cobranzas e Inversiones S.A.C. Collection services ,306 61,604 63,702 Scotia Sociedad Agente de Bolsa S.A. Stock market broker ,360 3,278 75,082 Scotia Fondos Sociedad Administradora de Fondos S.A. Administration of Mutual funds ,738 5,593 31,145 Scotia Sociedad Titulizadora S.A. Securitization , ,005 Patrimonio en Fideicomiso sobre Bienes Inmuebles Depsa Special purpose entity - 6,721 5,580 1,141 SBP DPR Finance Company Special purpose entity - 434, ,869 - C. Approval of financial statements In April 2016, the Audit Committee and Board of Directors approved the consolidated financial statements as of December 31, On May 12, 2016, the Bank's management approved the consolidated financial statements as of March 31, 2016, and they will be presented to the Board of Directors, within the terms established by law. Also, these consolidated financial statements have been prepared based on the individual financial statements of companies that are part of Scotiabank Perú S.A.A. and Subsidiaries and that will be presented for approval to the corresponding Audit Committee and Board of Directors, within the terms established by law. 7

12 2. Citibank del Perú S.A. Retail Business acquisition In December 2014, the Bank reached an agreement with Citibank del Perú S.A. to acquire the business of commercial banking, related to retail, and consumer banking of such entity. This acquisition was approved by SBS through SBS Resolution and was made official on May 1, As of that date, Citibank del Perú S.A. made a simple reorganization and transferred an equity block to its subsidiary Servicios SPV S.A.C., which transferred the 100% of shares representative of capital stock to the Bank, which also absorbed such entity at the same time under a merger process also approved by the SBS. Considering this purchase on the acquisition date, the carrying amount of assets and liabilities acquired were the following: In thousands of soles 2015 Assets Cash and due from banks 8,422 Loan portfolio 1,239,220 Investments in associate 7,000 Accounts receivable 2,948 Property, furniture, and equipment, net 7,247 Deferred tax assets 872 Other assets 9,317 1,275,026 Liabilities Deposits and obligations in financial system entities 535,552 Other liabilities 30, ,526 Total identifiable net assets 708,500 Adjustments to transfer the identifiable net asset to the fair value (5,734) Total identifiable net asset at fair value 702,766 Goodwill 287, ,840 This acquisition was accounted using the acquisition method as required by IFRS 3 Business Combinations, applicable on the transaction date. Assets and liabilities were accounted at the estimated fair value as of the acquisition date, except for loans and deposits which are accounted at their carrying amount at the date of acquisition in compliance with SBS regulations for these purposes. For this acquisition, the Bank paid in cash to Citibank del Perú S.A. an amount of S/ 989,840 thousand for an equity block (including 1,563,199 common shares of Servicios Bancarios Compartidos S.A. Unibanca S.A. with a fair value as of that date amounting to S/ 7,000 thousand) that at the time of purchase presented net assets acquired at fair value amounting to S/ 702,766 thousand; also, the Bank analysis to identify intangible assets as part of the acquisition process, determining no significant amounts. 8

13 3. Basis for the Preparation of Financial Statements A. Statement of compliance The accompanying consolidated financial statements have been prepared from the accounting records of Scotiabank Perú S.A.A. and Subsidiaries and are presented in accordance with current legal regulation and accounting principles authorized by the SBS and, in the absence of such applicable SBS standards, the International Financial Reporting Standards (IFRS), made official in Peru by the Peruvian Accounting Board (CNC) are applied. Such standards comprise the Standards and Interpretations issued or adopted by the International Accounting Standards Board (IASB), which include the IFRS, International Accounting Standards (IAS), and the Interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC), or the former Standing Interpretations Committee (SIC), adopted by the IASB and made official by the CNC for their application in Peru. B. Basis of measurement The consolidated financial statements have been prepared in conformity with the historical cost principle, except for the following: Derivative instruments are measured at fair value. Financial instruments at fair value through profit or loss are measured at fair value. Available-for-sale financial assets are measured at fair value. C. Presentation currency: The consolidated financial statements are presented in soles (S/) under SBS standards. The information presented in soles (S/) and has been rounded to the nearest thousand (S/ 000), except as otherwise indicated. D. Significant accounting estimates and criteria The preparation of the consolidated financial statements in conformity with accounting principles requires management to use certain critical accounting estimates and criteria. Estimates and criteria are evaluated continuously according to experience and include reasonable future assumptions for each circumstance. Since these are estimates, final results might differ; however, according to Management opinion, the estimates and assumptions applied do not have significant risk as to produce a material adjustment to the balances of assets and liabilities in the short term. The significant estimates related to the consolidated financial statements correspond to provision for doubtful loans, valuation of investments, estimation of useful life and the recoverable amount of property, furniture, and equipment, intangible assets, impairment of goodwill, provision for realizable assets, received as payment and repossessed assets, estimate of the deferred sales tax recovery, provision for income tax, and the fair value of derivative instruments. Accounting criteria is described in note 4. 9

14 4. Accounting Principles and Practices The main accounting principles and practices applied to prepare the consolidated financial statements of Scotiabank Perú S.A.A. and Subsidiaries, which have been consistently applied in previous period, unless otherwise indicated, are the following: A. Basis of consolidation The consolidated financial statements include the financial statements of entities comprising Scotiabank Perú S.A.A. and Subsidiaries, described in note 1, after eliminating significant balances and transactions among the consolidated companies, and the profits and losses resulting from those transactions. All subsidiaries have been consolidated from its date of incorporation or acquisition. Subsidiaries are all companies over which the Bank has control and is able to manage its financial and operating policies. The accounting records of companies of Scotiabank Perú S.A.A. and Subsidiaries comply with the information requirements established by the SBS. Financial statements of the Subsidiaries and special purpose entity have been included for consolidation purposes and represent 7.79% and 7.59%, respectively, of the total Bank s assets before eliminations as of March 31, 2016 and December 31, As of those dates, there is non-controlling interest resulting from the consolidation process. B. Financial instruments A financial instrument is any contract that gives rise to both a financial asset in one entity and a financial liability or equity instrument in another. Financial instruments are recognized on the date when they are originated and are classified as assets, liabilities or equity instruments according to the substance of the contract. Interest, gains and losses generated by a financial instrument, whether classified as an asset or liability, are recorded as income or expense. The payment to holders of financial instruments classified as equity is recorded directly in shareholders equity. Scotiabank Perú S.A.A. and Subsidiaries classify their financial instruments in one of the following categories defined by IAS 39: (i) financial assets and liabilities at fair value through profit or loss, (ii) loans and accounts receivable, (iii) available-for-sale investments, (iv) held-to-maturity investments and (v) other financial liabilities. Scotiabank Perú S.A.A. and Subsidiaries determine the rating of financial instruments at initial recognition and on the basis of instrument by instrument. The classification of financial instruments at initial recognition depends on the purpose for which the financial instruments were acquired and their characteristics. All financial instruments are initially recognized at their fair value plus incremental costs directly attributable to the acquisition or issuance of the instrument, except in the case of financial assets or liabilities held at fair value through profit or loss. Purchases or sales of financial assets requiring the provision of assets within a time frame established according to regulations or market conventions (regular market terms) are recognized at the contracting date. 10

15 Derecognition of financial assets and liabilities i. Financial assets A financial asset (or when applicable, a part of a financial asset or a part of a group of similar financial assets) is derecognized when: (i) The rights to the cash flows from the asset expire; or (ii) Scotiabank Perú S.A.A. and Subsidiaries have transferred its rights to receive cash flows of assets or have assumed an obligation to pay total cash flows to a third party by virtue of a transfer agreement; and (iii) Scotiabank Perú S.A.A. and Subsidiaries have substantially transferred all of the risks and rewards of the asset, or if they have neither transferred all risks and rewards of the asset nor substantially retained them whether it has relinquished control of the asset or not. ii. Financial liabilities A financial liability is removed when the payment obligation is discharged, cancelled or expires. When an existent financial liability is replaced by other of the same borrower in terms significantly different, or terms are significantly modified, such replacement or modification is treated as a derecognition of the original liability and a recognition of a new liability, recognizing the difference between both of them in the results of the period. Financial instruments offsetting Financial assets and liabilities are offset and the net amount is presented in the consolidated statement of financial position, when, and only when: (i) a current legal right to offset the amounts exists and (ii) there is an intention either to settle them on a net basis or to realize the asset, and settle the liability simultaneously. The financial assets and liabilities presented in the consolidated statement of financial position correspond to cash and due from banks, interbank funds, investments at fair value through profit or loss and available-for-sale investments, financial instruments at fair value, loan portfolio, accounts receivable, other assets and liabilities in the consolidated statement of financial position, except as otherwise indicated in the note corresponding to assets or liabilities. Likewise, all derivative products and indirect credits are considered financial instruments. Accounting policies on recognition and valuation of these items are disclosed in corresponding accounting policies described in this note. C. Derivative instruments The SBS provides authorizations per type of derivate instrument contract and underlying asset, and may comprise more than one type of contract and underlying asset. Authorization schemes, valuation guidelines and accounting treatment for derivative instruments that financial entities shall apply are established in SBS Resolution Regulation for Trading and Accounting of Derivative Products in Financial System Enterprises and its amendments which include accounting criteria for held-for-trading, hedging and embedded derivative operations which conform to IAS 39 Financial Instruments: Recognition and Measurement. Recognition and measurement Held-for-trading derivative instruments are initially recognized in the consolidated statement of financial position at fair value; subsequently, any change in the fair value of such derivative generates an asset or liability in the consolidated statement of financial position, as applicable, and will affect the results of the period. 11

16 In addition to their recording in the consolidated statement of financial position, derivative instruments described above are accounted in contingent accounts at their notional amounts translated at the spot exchange rate. As of March 31, 2016 and December 31, 2015 and for the years then ended, Scotiabank Perú S.A.A. and Subsidiaries do not hold derivative instruments classified as hedging nor embedded derivatives. D. Investments Scotiabank Perú S.A.A. and Subsidiaries apply the recording and valuation criteria of investments established in SBS Resolution Regulations for Classification and Valuation of Investments of Financial System Companies, which is in line with the classification and valuation criteria stated in IAS 39 Financial Instruments: Recognition and Measurement, except for investments in associates; which are not within the scope of IAS 39, as detailed below: i. Investments at fair value through profit and loss Debt securities and equity shares are classified as investments at fair value through profit or loss if they have been acquired principally for the purpose of selling in the near future, or they form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking. These financial assets are recognized on trade date, when Scotiabank Perú S.A.A. and Subsidiaries enter into contractual arrangements with counterparties to purchase securities, and they are normally derecognized when sold. Measurement is initially made at fair value without including transaction costs, which is recognized in the consolidated income statement. Subsequently, fair values are re-measured, and fluctuations generated through profit or loss are recognized in the consolidated income statement. Interest income is recognized using the effective interest rate method. Dividends are recognized in the consolidated income statement when the right to receive the payment has been established. Investment at fair value through profit or loss that are given in guarantee or transferred through a repurchase agreement shall be reclassified as available-forsale. Once these transactions are concluded, instruments shall be reclassified at their initial category, transferring the unrealized earnings from shareholders equity to the consolidated income statement. ii. Available-for-sale investments Available-for-Sale Investments are all other investment instruments that are not classified as Investments at Fair Value through Profit or Loss, Held-to-Maturity Investments and Investments in Associates. Likewise, investment instruments will be included in this category when the SBS explicitly requires it. 12

17 Available-for-Sale Investments are initially recognized on the trade date and measured at fair value plus direct and incremental transaction costs. They are subsequently re-measured at fair value, and changes therein are recognized in equity in the unrealized earnings account until the securities are either sold or impaired. When available-for-sale securities are sold, cumulative gains or losses previously recognized in equity are recognized in the consolidated income statement. If an available-for-sale security is impaired, the cumulative loss (measured as the difference between the asset s acquisition cost, net of any principal repayments and amortization, and its current fair value, less any impairment loss on that asset previously recognized in the consolidated income statement and other comprehensive income) is removed from equity and recognized in the consolidated income statement. In the case of unquoted equity shares, the impairment loss shall be the difference between the carrying amount and the present value of estimated future cash flows, discounted using current market rates for similar assets. Gains or losses from foreign exchange differences related to instruments representing capital shall be recognized in equity in the unrealized earnings account while those related to debt instruments shall be recognized in the consolidated income statement. Interest income is recognized on available-for-sale securities using the effective interest rate method, calculated over the asset s expected life. Premiums and/or discounts originated on the investment purchase date are included in the calculation of its effective interest rates. Dividends are recognized in the consolidated income statement when the right to receive the payment has been established. iii. Investments in associates The account includes equity shares acquired to participate with and/or have significant influence over companies and institutions. This category shall include the goodwill determined in the purchase of such investments. Investments in Associates are initially measured at fair value plus transactions costs directly attributable to their acquisition, They are subsequently measured applying the equity method, meaning; the carrying amount of the investment will be increased or decreased by proportional recognition of the period s results obtained at the measurement date. When variations in the equity are due to concepts other than the results of the year; these variations shall be accounted directly in the shareholders equity. Dividends are accounted reducing the investment carrying amount. Investment instruments held by companies can be reclassified. Investment instruments at fair value through profit or loss cannot be reclassified except: (1) for equity shares with no market quote lacking of reliable fair value estimations or (2) investment instruments transferred through a repurchase agreement or given in guarantee. During the three month period ended in March 31, 2016 and year 2015, the Bank has not reclassified its investment instruments in categories. 13

18 SBS Resolution details a standard methodology for the identification of impairment of instruments classified as available-for-sale investments, which considers two filters; the first one contains two conditions: i) significant decrease in the fair value up to under 50% of the cost or, ii) a decrease exceeding the 20% consecutively during the last twelve months; in the event of meeting any of these two conditions of the first filter, it will be necessary to evaluate if these conditions are justified at least concerning two of the qualitative aspects of the issuer indicated in the second filter of such resolution. During the three month period ended in March 31, 2016 and during the year 2015, the Bank has not recognized impairment losses on investment instruments. E. Loans, classification and provision for doubtful loans Direct loans are recorded when fund disbursements are made to clients. Indirect loans (contingent) are recorded when documents that support such credit facilities are issued and may became direct loans in the event of making a payment to third parties. Likewise, changes in loan payment conditions due to debtors payment difficulties are considered as refinancing or restructuring. Finance lease operations are accounted for using the financial method, recording the amount of the receivable installments as loans. Corresponding finance income is recorded on an accrual basis in conformity with the lease agreement terms. Initial direct costs are recognized immediately as expenses. The Portfolio Risk Management s Debtor Classification Unit is responsible for conducting, the evaluation and rating of the loan portfolio on a permanent basis. Each debtor receives a credit risk rating according to the guidelines established by the SBS Resolution and its amendments. Loan portfolio classification The Bank and CrediScotia Financiera S.A. classify their loan portfolio in two groups: Wholesale Banking (corporate, large companies and medium companies) and Retail Banking (small business, micro business, revolving consumer, non-revolving consumer and mortgage loans). These classifications are made considering the nature of the client (corporate, government or individual), the purpose of credit, and business size measured by revenues, indebtedness, among other indicators. Credit risk rating categories The categories of credit risk rating established by the SBS are as follows: Standard, Potential Problem, Substandard, Doubtful, and Loss, which are assigned according to credit history of the debtor as established in SBS Resolution and amendments. For the Wholesale Banking portfolio, the Bank and CrediScotia Financiera S.A. mainly consider the payment capacity of debtor, cash flow, level of compliance with obligations, rating designated by other companies in the financial system, financial position, and quality management. For Retail Banking portfolio, the rating is based mainly on the level of compliance with credit payments, which is reflected by number of delinquent days and their classification in other financial system entities if rating alignment is applicable. Retail Banking portfolio is classified through an automatic rating process. The Bank has included in the automatic rating process, wholesale debtors loan portfolio with credits up to US$100 thousand. 14

19 Provisions for doubtful loans According to current SBS regulations, the Bank and CrediScotia Financiera S.A. determine generic and specific provisions for doubtful loans. The generic provision is recorded in a preventive manner for standard risk direct loans, credit risk equivalent exposure of indirect loans, and additionally the procyclical component when the SBS orders its application. Specific provision is recorded for direct loans and credit risk equivalent exposure of indirect loans for which a specific risk, higher than standard, has been identified. The equivalent credit risk exposure of indirect loans is determined by multiplying indirect loans by the different types of Credit Conversion Factor (CCF), as follows: (i) Description CCF (%) Confirmations of irrevocable letters of credit for up to one year, when the issuing bank is a first level entity from a foreign financial system. 20 (ii) Standby letters of credit that support obligations to do or not do. 50 (iii) Import credit guarantees, and those not included in the previous item, as well as bank acceptances. 100 (iv) Granted loans not disbursed and unused credit lines. 0 (v) Others not considered above. 100 Provision requirements are determined by considering the risk rating of the debtor, if it is backed by collaterals or not, and depending on the type of collateral. The Bank and CrediScotia Financiera S.A. apply the following percentages to determine provisions for the loan portfolio: Without collateral With preferred collateral With preferred easily realizable collateral With preferred readily realizable collateral Risk Rating Standard Corporate loans Large-business loans Medium-business loans Small business loans MES loans Consumer loans (*) Mortgage loans Potential problem Substandard Doubtful Loss (*) Include revolving and non-revolving consumer loans. 15

20 Procyclical component The rates of procyclical component to calculate the provisions for direct loans and credit risk equivalent exposure of indirect loans for debtors classified a Standard are as follows: Procyclical Type of credit component % Corporate loans 0.40 Large-business loans 0.45 Medium-business loans 0.30 Small-business loans 0.50 Micro business loans 0.50 Revolving consumer loans 1.50 No revolving consumer loans 1.00 Mortgage loans 0.40 For corporate, large-business and mortgage loans that have preferred readily realizable collateral, the procyclical component rate is 0.3%. For all other types of credit with preferred readily realizable collateral, the procyclical component rate is 0% for the portion covered by such collateral. For consumer loans supported by payroll discount agreements, the procyclical component rate is 0.25%. The SBS can activate or deactivate the application of the procyclical component whether the average annual percentage of the Gross Domestic Product (GDP) is above or below 5%, respectively. Likewise other conditions for activation or deactivation are set out in Appendix I of SBS Resolution The application of the procyclical component was activated between December 2008 and August 2009, and between September 2010 and October From November 2014, it is deactivated. SBS has established that during the deactivation of the procyclical component, financial institutions cannot, under any circumstances, generate profits caused by the reversals of such provisions, which should only be used to record specific mandatory provisions. Provisions for direct loans are presented deducting balances from the corresponding asset (note 8), and provisions for indirect loans are presented as liabilities (note 16). F. Securities trading transactions carried out by third parties Scotia Sociedad Agente de Bolsa S.A. conducts security trading transactions carried out on behalf of its clients (principals). Transfer of funds made by clients for purchase/sale transactions in the stock market and over-the-counter market result in the consolidated statement of financial position only if they comply with assets definition (accounts receivable) and liabilities definition (accounts payable); otherwise, such balances are presented more appropriately in control accounts. An account receivable or payable is only recognized when they have not yet been settled at their maturity or if Scotia Sociedad Agente de Bolsa S.A., due to any operating cause, does not have the funds transferred by principals, however, since it is a solvent entity, funds are covered by Scotia Sociedad Agente de Bolsa S.A. in an amount equivalent to the acquisition of securities acquired through a loan that is regularized almost immediately. 16

21 Since Scotia Sociedad Agente de Bola S.A. only manages funds from principals, in its capacity as trustor, cannot use these resources and there is a commitment to return them to the trustees; these resources do not belong to the entity and are accounted in memoranda accounts. Unsettled transactions by Bolsa de Valores de Lima S.A. are accounted in memoranda accounts, until corresponding collection or payment. G. Property, furniture, and equipment The property, furniture, and equipment are accounted at the historical acquisition cost, less accumulated depreciation and impairment losses. Disbursements incurred after acquisition of property, furniture, and equipment are recognized as assets when there are probable future economic benefits associated with the asset are generated for Scotiabank Perú S.A.A. and Subsidiaries, and costs can be reliably measured. Maintenance and repair expenses are charged to profit or loss of the fiscal period in which they are incurred. Work-in-progress and in-transit goods are accounted at acquisition cost. These goods are not depreciated until relevant assets are finished and/or received, and are in operative condition. Depreciation is determined based on the straight-line method using the following estimated useful lives: Years Property and premises Between 30 and 10 Furniture, fixtures, and IT equipment Between 10 and 2 Vehicles 5 Cost and accumulated depreciation of assets disposed or sold are eliminated from their respective accounts, and any resulting gain or loss is included to results in the period in they are incurred. H. Realizable assets, received as payment, repossessed assets Realizable assets include assets purchased specifically for granting financial leases which are accounted initially at their acquisition cost. Further, realizable assets not granted as financial leases, including recovered assets, are accounted at the lower of its cost or market value. Realizable assets, received as payment, and repossessed assets (note 13) are regulated by SBS Resolution This caption mainly includes property, plant, and equipment received as payment for doubtful loans, and are initially accounted at the lower of value determined by the court, arbitrator, recovery value, estimated market value or the value of unpaid debt amount. 17

22 According to current legislation, the treatment to record provisions for this type of assets is as follows: Realizable assets, received as payment and repossessed assets are initially accounted at cost and at the same time, a provision equivalent to 20% of the cost. If the net realizable value shown in the valuation report demonstrates that the asset is impaired by a percentage higher than 20%, then the required initial provision shall be accounted at an amount equivalent to the amount effectively impaired. For furniture and equipment, the Bank records a monthly provision equivalent to 1/18 of the cost in books, less the aforementioned initial provision. Regarding goods that have not been sold or leased within a one-year term and that do not have the extension established in the Banking Act, the provision shall be completed up to 100% of the value upon repossession or recovery less the impairment provision, at the close of the corresponding year. A provision shall be accounted for real estate that has not been sold or leased within one year from its recovery or repossession. This provision shall be a uniform monthly provision over a term of three and a half years until there is a 100% provision of the net carrying amount in books obtained in the eighteenth or twelfth month, depending on if there is or is not an extension approved by the SBS, respectively. An impairment loss is recognized in the consolidated income statement when the net realizable value is lower than net carrying amount; accordingly, the carrying amount will be reduced and the loss shall be recognized in the consolidated income statement. In cases where the net realizable value is higher than the net carrying amount, the higher value shall not be recognized in the books. Valuation reports of real estate may not be aged over a year. I. Value impairment Scotiabank Perú S.A.A. and Subsidiaries establish criteria for the identification of impaired assets based on the classification of financial and non-financial assets. On each reporting date, Scotiabank Perú S.A.A. and Subsidiaries review the carrying amounts of financial assets (other than deferred tax assets) to determine whether there is any indication of impairment. If such indications exist, then the recoverable amount or the financial asset is estimated. Goodwill owns an indefinite useful life and it is proved through impairment every year or more frequently, when there are events or circumstantial changes indicating that goodwill balance might not be recoverable. For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets. The recoverable amount of an asset is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognized if the carrying amount of an asset exceeds its recoverable amount. 18

23 Impairment losses are recognized in the consolidated income statement. Impairment loss in respect of recognized in goodwill is not reversed. For other assets, an impairment loss is reversed only if the carrying amount of an asset does not exceed the carrying amount that would have been determined, net of amortization or depreciation, if no impairment loss had been recognized. J. Income tax Current income tax is determined based on the taxable income and recorded according to tax legislation applicable to the Bank and each company that are part of Scotiabank Perú S.A.A. and Subsidiaries independently (note 26). Deferred income tax is accounted using the liability method based on temporary differences derived from tax accounting of assets and liabilities, and their balances in the financial statements of each company that is part of Scotiabank Perú S.A.A. and Subsidiaries based on tax rates and legislation expected to be applied when the deferred tax asset is realized or the deferred tax liability is settled (note 27). Deferred tax assets and liabilities are recognized without considering the estimated time when the temporary differences will disappear. Deferred tax asset is only recognized if it is probable there would be future tax benefits, so that the deferred asset can be used. K. Intangible assets Intangible assets are mainly related to the acquisition and development cost of computing software shown in the Other assets item and are amortized using the straight-line method over an average period of 3 years. Likewise, they include depreciable costs coming from commercial activities of Crediscotia Financiera S.A. and are amortized during the effectiveness of the contract. Costs related to the development or maintenance of computing software are recognized in the income statement when they are incurred. However, costs that are directly related to a single and identifiable computing software, package or program, controlled by Management and that will give future economic benefits higher than their cost in a period exceeding one year, are considered as an intangible asset. Direct costs related to the development of computing programs include personnel costs of the development team and a fractional part of general expenses. L. Goodwill Goodwill is the difference between the acquisition costs (amount paid) versus identifiable fair values of its subsidiary (note 11). Business acquisitions are accounted using the purchase accounting method. This means, recognizing identifiable assets of the acquired company at fair value. Any excess between the acquisition cost and the fair value of the identifiable net assets is recognized as goodwill. 19

24 When the acquisition agreement foresees adjustments to the price based on the compliance with some future assumptions, and at the moment of the initial accounting, its occurrence has not arisen or the value cannot be reliably estimated, this adjustment is not included in the acquisition cost. If, subsequently, such adjustment becomes likely and can be reliably estimated, the additional amount will be treated as an adjustment to the acquisition cost. M. Securities, bonds, and obligations issued This includes the liability for the issuance of redeemable subordinated bonds and corporate bonds; those are measured at their amortized cost using the effective interest method. Discounts granted or income generated during the bonds issuance is amortized during the maturity term of these instruments. Interest is recognized in results when accrued. N. Provisions and Contingencies i. Provisions Provisions are recognized when Scotiabank Perú S.A.A. and Subsidiaries have a present obligation, either legal or assumed, as a result of past events, and when it is probable that an outflow of resources will be required to settle the obligation, and it is possible to reliably estimate its amount. Provisions are reviewed and adjusted in each period to reflect the best estimates as of the date of the consolidated statement of financial position. When the effect of the time value of money is material, provisions are discounted using an interest rate reflecting the current market rate for time value of money and specific risks of liabilities. The provision for severance payment (CTS) is calculated according to current legislation, on the total employees indemnities and should be paid through deposits in authorized financial entities as chosen by them. Calculation is made for the amount that should have to be paid as at the date of the consolidated statement of financial position and it is included in the Provision for fringe benefits account. It is presented in the consolidated statement of financial position under Other liabilities. ii. Contingencies Contingent liabilities are not recognized in the consolidated financial statements. They are disclosed in the notes to the consolidated financial statements, unless the possibility of an outflow of economic resources is remote. Contingent assets are not recognized in the consolidated financial statements, and they are only disclosed when an inflow of economic benefits is probable. O. Income and expense recognition Interest income and expenses are recognized in profit or loss corresponding fiscal year on an accrual basis, depending on the effectiveness of the generating transactions and the interest rate agreed with the clients. Commissions for banking services are recognized as income when earned. 20

25 SBS Resolution establishes that this income from commission of indirect loans shall be recognized on an accrual basis during the term of such indirect loans. Likewise, commissions and expenses for formalization of loans, as well as opening, study and evaluation of direct and indirect loans, are recognized as income based on the accrual within the term of the corresponding contracts. When management considers that there are reasonable doubts about the collectibility of the principal of a loan, the Bank and CrediScotia Financiera S.A. suspend the recognition of interest in the income statement. Interest in suspense is accounted in memoranda accounts and recognized as earned when collected. When management considers that the financial situation of the debtor has improved and that the doubt about the collectibility of the principal has dissipated, the recording on accrual basis is restated. Interest income includes the return on fixed-income investments and trading securities, as well as the recognition of discounts and premiums on financial instruments. Dividends are accounted as income when declared. Brokerage service fees for buying and selling securities on the stock market are recorded in the "finance services income" account when these transactions have been performed through generation and acceptance of operation policies by clients. Revenues from sales of securities and its cost are recognized when the seller has transferred all the risks and rewards of ownership to the buyer and it is probable that economic benefits associated to the transaction will flow to the Company; they are recorded in the entity "other income, net" on the consolidated income statement. Dividends are accounted as income when declared. Income from remunerations of funds managed by Sociedad Administradora de Fondos, are estimated daily as an equity percentage of each of the funds. Income generated by fees from redemption of shares is recognized as income when such redemption is carried out. Fees for trust management services are recognized in profit or loss of the period to the extent the service is rendered and accrued. Other income and expenses of Scotiabank Perú S.A.A and Subsidiaries are recognized as earned or incurred in the period when they are accrued. P. Capital stock Common shares are classified as equity. Preferred shares, if any, are recorded as other debt instruments; the difference between the redeemable amounts of preferred shares and their par value being recorded in the capital account. Dividends on preferred shares are accounted as liabilities and charged to income of the period. As of March 31, 2016 and December 31, 2015, Scotiabank Perú S.A.A. and Subsidiaries do not hold preferred shares outstanding. Q. Employees profit sharing Scotiabank Perú S.A.A. and Subsidiaries recognize a liability and an expense for employees profit sharing in the consolidated income statement based on 5% of taxable base determined according to the current tax legislation. 21